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U.S. labor market 'an important buffer' to recession, top economic adviser says

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White House Council of Economic Advisers Member Jared Bernstein joins Yahoo Finance Live to discuss the state of the economy, inflation, recessionary risks, the labor market, and the Democrats’ climate and health care bill with Sen. Joe Manchin (D-WV).

Video Transcript


- We learned this morning that US GDP declined for a second straight quarter shrinking by 0.9%. It's the second consecutive decline in growth, heightening the debate around a US recession.

Joining us now for more on the state of the US economy is Jared Bernstein member of the White House Council of Economic Advisors.

Jared, it's always good to get time with you. As you know, there's a lot of discussion here. Is it a recession? Is it not a recession? Does it matter if it's a recession if people feel like it's a recession?

And I think that last question is probably the most pertinent here. As you talk about messaging from the White House, most Americans are convinced things are bad right now, whatever you want to call it.

JARED BERNSTEIN: I do think that's the right way to frame this. How are people feeling about the current economy? And look, there's no question that unacceptably high inflation, as the President continuously presses on that point, is upon the land and really discomforting to family budgets.

But at the same time, we shouldn't forget that we're coming out of a breakneck growth pace in '21 where GDP growth was many times above trend.

Now, as the Federal Reserve steps on the brake to slow the economy down and fulfill its role as the first and foremost inflationary fighting institution, we've expected to see slower job growth, I'm sorry, slower GDP growth.

But the key is how are jobs faring? How's the labor market faring? How's consumer spending? All of those remain in solid territory.

And that is a very important backdrop, a tailwind, in an economy with, as you've correctly pointed out, has significant headwinds as well.

- Jared, are we looking at, right now, a pre-recession?

JARED BERNSTEIN: The recession question is one that gets answered by the National Bureau of Economic Research. And they go back and they look at a set of variables, probably the most prominent ones are payroll employment.

So that's been very strong. Industrial production, that's up. Consumer spending, real consumer spending, up 1% in today's report.

Now, how do you get positive consumer spending and a negative handle on GDP? Inventories are a big part of the story. They took two points off of GDP growth. But that doesn't mean that inventories fell. What it means was that the inventory buildup slowed.

In fact, inventories grew by more than $80 billion. But that's slower than last quarter. And that shows up as a negative in GDP.

- If we were to tip into a real recession, or fully feel kind of the brunt of a recession, from everything in employment all the way through how consumers are spending, how businesses are kind of gauging their own ability to move forward and operate, does the White House believe that the Fed should dampen its stance on how quickly they're tightening and being more aggressive in policy?

JARED BERNSTEIN: One of the hallmarks of this White House, in contrast to the prior one, is that we stay way the heck out of the Fed's knitting, especially when it comes to more granular calls like that one.

As I've noted, more importantly, the president has emphasized, Fed independence is a critical component of letting them do what they have to do to attack this unacceptably high level of inflation.

What I would tell you is that the backdrop that Americans face in terms of the strong job market, 3.6% unemployment for four months in a row, 375,000 payroll gains on average over the past three months, that certainly creates a really important buffer, a backdrop for those elevated prices putting pressure on family budgets.

Budgets, by the way, that are somewhat supported by strong balance sheets. I think that's one of the reasons why we got a 1% plus in consumer spending in this report.

I think key looking forward, by the way, are some things on the legislative agenda. Today is one of the first days I could come out here and talk about this Inflation Reduction Act, the reconciliation plan. Huge opportunities for investment.

The Chips Act, huge opportunities for investment in key areas of American domestic semiconductor production. So I think those actually are very promising opportunities for the future.

- Jared, with inflation still staying high and more companies announcing hiring freezes, should the average American household be cutting spending?

JARED BERNSTEIN: The average American household, according to this GDP report with its negative handle on everything, increased spending in the second quarter by 1%.

Now, how does that happen? Well, another little nugget buried in this report is aggregate compensation. That's all the earnings growth that people have in the economy. That's the trillions, not the average wage. That actually beat inflation by a touch in the quarter.

So if you have a strong labor market supporting strong aggregate compensation and you have balance sheets thanks to shots in arms and checks in pockets way back in March of 2021 that are still in quite good condition, you're going to support consumer spending even while these other economic headwinds are in play.

So I think both of those forces need to be reckoned with and we're trying to understand the dynamics in this economy

- Jared, you mentioned the reconciliation package and the agreement that the White House has gotten with Joe Manchin. And I want to dig into that a little bit because on the one hand, you have in particular all of these climate and energy incentives which I know that people on the left have been working on and pushing for, for a long time.

Some of that being paid for by this minimum tax on corporations of 15%. Has the White House gotten a lot of pushback from corporations on that? And is there any risk to economic growth and spending on the part of companies from the institution of that tax?

JARED BERNSTEIN: Well, let me start by saying that the threshold for that tax, and I think any time we talk about it, we ought to probably lead with this, is a billion dollars in profits. I believe it's averaged over the past three years.

And so that's a really important, I think, piece of that minimum tax. One of the things that we've continuously stressed, ever since we were talking about President Biden's highly progressive tax proposals, are that they don't hit anyone under $400,000 of income.

Now look, this is called an Inflation Reduction Act in no small part because these tax increases do a couple of things. They very much, particularly this minimum, this book minimum of 15%, they very much improve tax fairness, which has been sorely missing from that part of our tax code.

And they lower the budget deficit, which is not only useful for our fiscal accounts, but it's also disinflationary. So that's, I think, one of the reasons this bill gets its name as the Inflation Reduction Act.

- Just additionally, while we have here, because it's helpful to know, or at least understand, what's changed significantly from the first time elements of this bill were introduced to this point now that has finally gotten Senator Manchin over the line?

JARED BERNSTEIN: Well, we have a lot of negotiators that have been working really hard on this. Obviously, President Biden has always been in the mix, the Democrats Leader Schumer.

I wasn't part of those negotiations. So I have a readout of all the personnel. What I can tell you is I've worked with Joe Biden for a long time. And he just hasn't ever stopped pulling legislative rabbits out of hats.

So look, this is Washington. And if you have a President who believes in keeping hope alive, sometimes you're going to get a result like this. And it's a very pleasing one.

We have to make sure that we continue on track and listen to the president's admonition to get this to his desk as soon as possible. Because trust me, he is anxious to sign it.